While one cannot disagree with the intention behind it, the ban is operationally distortive and, like other indirect and indiscriminate measures, serves to harm the poorest segments within the real estate and automobile industries the most.

Handbrakes for the poor

Consider the automobile industry. The ban applies to sales and new registrations of all local and imported cars.

In other words, a non-filer cannot get an unregistered car, but is still able to purchase and transfer a used or registered one.

In the backdrop of this step, new car sales are down, direct bookings are down, and thousands of people have instead claimed refunds.

Approximately 75 per cent of non-filers opted to cancel their orders instead of filing tax returns.

More concerningly, most of this downtrend is in the smallest category of cars: less than 1000cc, and the largest drops in sales are reported by Suzuki on two of their cheapest models. Sales of Mehran were down 42pc, while those of Ravi were down 50pc.

I would remind you here that Mehran is the cheapest amongst all local and imported new cars in the market, and Ravi serves as the low-cost commercial vehicle of choice for small business owners.

The situation has upended traditional incentive structures in the market.

The automobile industry is generally constrained by limited supply and production capacity.

As a result, buyers have to 'book' their vehicles and wait several months until they get delivered.

Dealers take advantage; they order large numbers of vehicles and offer them to buyers instantly in return for hefty premiums.

Restrictions on first-time registrations add another opportunity for dealers to make a windfall, while consumers and manufacturers stand to lose.

There is a simple opportunity for tax-filing dealers to charge large premiums simply by registering new vehicles and selling them as such to filers and non-filers alike.

If this practice takes root, any additional premium will disproportionately impact buyers with the least purchasing power – those who may have saved for years to buy a car, and those with incomes lower than minimum tax brackets.

While the amended finance act provides exemptions for motorcycles and vehicles less than 200cc, all cars are treated indiscriminately.

As an example, buyers on the lowest rung of the new car market would be crushed by any extra amount they may have to pay in premiums.

They will be forced to choose between paying the premium, filing their returns — which is the aim, even if such filing does not generate additional revenue for the government — or deciding against buying a new car in the first place.

As for rich non-filers, who are ostensibly the target of this ban and whose income may or may not be taxed, an extra Rs500,000 in premiums for a five million-rupee car would not hurt as much.

If indeed a buyer has large undocumented or illegal sources of income, the incentive would be to pay the premium instead of filing taxes. This is consistent with the proportions of decreases in car sales by market segment.

On the other hand, if the slowdown in the automobile industry continues, manufacturers may be forced to shrink production — and leave hundreds of people directly and thousands indirectly jobless.

As reported in articles I have cited above, industry experts and representatives have already sounded the alarm bells in recent weeks.

Deconstructing the economy

Property and real estate markets present an even more complicated scenario.

To start, we would do well to separate speculative holdings of vacant plots and unmarked files from the construction market.

It is also generally believed that dirty money is parked in such investments. They thus represent the dirty underbelly of an industry that has the potential to herald unparalleled growth for our economy.

However, there are other ways to regulate such investments. Building and occupancy requirements are two of the many regulations that cities around the world actively enforce.

Banning transactions is the most unimaginative strategy I can conceive of.

While we can understand the rationale to target rich, possibly criminal, investors, we must consider the impact of such a move on labour.

Construction of housing stock has large external benefits. These accrue in added employment, gross value added and added labour income, and reflect in increases in total output over and above the simple amount invested directly in construction activities.

Because of these multipliers, housing is often referred to as the precursor of future economic performance.

Induced multipliers may kick in after some lag; housing can therefore both indicate and drive economic activity.

While growth, investment and employment generate positive multiplier effects, the converse also holds.

A shrinking industry that does not transform may lead to negative ripple effects, and the failure of an industry or even a single, significant market player may have a domino effect that precipitates a full-blown crisis.

The ban on property transactions is indiscriminate amongst non-filers and precludes both potential home owners and investors from buying or starting new construction projects worth more than Rs4 million.

At today’s prices, Rs4 million will hardly cover construction costs for a single story, 10-marla house without adding the cost of land.

While this would understandably prevent holders of undocumented wealth from accumulating profit on construction and real estate projects, it would also take away livelihoods from labourers who would have worked on those projects.

Most informal jobs in construction are manual labour, which is tedious, underpaid and exploitative. However, it is also the only way for many of Pakistan’s poorest labourers to survive.

Even very little interaction with construction subcontractors in Pakistan’s labour market will reveal interesting dynamics at play. In the past several months, they have described increasingly despondent conditions.

Markets are “ice cold”, they say, and they are only finishing off contracts they had secured before this restriction was put in place. Because most labour is hired on a daily wage basis, the transfer of this slowdown is immediate.

The transaction ban, then, is intended to target investors with untaxed money, but is having serious unintended consequences for the poorest segments in our population.

Two things are important here: one, to realise that not all non-filers hold untaxed wealth; and two, that informality is not automatically criminal or illegitimate.

Our tax regime is such that salaried individuals may be paying more tax than they owe without filing. Similarly, many small contractors pay final liabilities at source.

Construction is a necessary, integral part of the economy and not an illegitimate or criminal activity like corruption or drug peddling.

Perhaps most importantly, labourers who work in automobile and construction sectors don’t make enough to file and have no recourse to alternative sources of livelihood if their employer is not tax compliant.

Without creating those alternatives, we are only distributing hopelessness and hunger, and losing out on the indirect taxes that these transactions generated for the state before the ban was introduced.

Stuck in a rut

I am not suggesting that we ignore tax enforcement, or that the current low-level equilibrium of informal labour, exploitative wages and uncompetitive industries is the best we can do.

However, a transaction ban does not solve structural issues in taxation or the automobile and construction industries. It just makes for good optics.

As a result of inbuilt inefficiencies, we are unable to enforce even the penalties for tax evasion that are already in place.

Unlike a ban on transactions, formal prosecution is not indirect; it targets and penalises only those who are established tax evaders or criminals with black money.

However, instead of delving deeper into why those enforcement mechanisms fail, we continue to look the other way and escape through solutions like indirect taxes, differentiated transaction costs for filers and non-filers and the latest ban on transactions.

The government can surely do better than a blanket ban on transactions.

We are amidst a well-acknowledged economic crisis: stocks have tanked, real estate markets have slowed down and we are looking at high cost-push inflation and double-digit interest rates in the weeks and months to come. The rupee is at an all-time low, oil prices are high and our deficits are at record levels.

I hope that we will learn our lessons, and also that we will step up in our efforts to introduce structural reforms in tax collection.

Perhaps one day, after those reforms, we will not have to play on the margins like we are doing today.

Are you researching Pakistan's political economy? Share your insights with us at blog@dawn.com

On DawnNews

Comments (35) Closed

Owais

Nov 07, 2018 05:07pm

I always thought filing a tax return is much easier than buying & registering a vehicle.

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Mohammad Fawad

Nov 07, 2018 06:39pm

In Pakistan anyone who can buy a new car even Suzuki or property worth 5 million is not poor. They most likely belong to lower middle class or above. They should be able to file their taxes and others among us should stop making excuses for them.

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Danish

Nov 07, 2018 08:07pm

Pakistan tax system is pathetic To generate taxes there are so many ways ftom people who are not tax filer. Tax department need to reform 99%tax department is corrupt and and have no clear direction how to generate tax from public.

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naim

Nov 07, 2018 08:35pm

In developed countries, there are no informal economies. The reason is that in such countries every child born is registered in the birth register, is by law put compulsorily into a school at the age of 5 or 6, and the education is mandatory up to 8th class, and free up to 12th class. The educated get jobs, while the highly educated get high-paying jobs in registered firms and corporations that exist in plenty in those countries. In poor countries like ours, education is not supported by the government, most people have no jobs or are day-labourers, there are few firms or companies, and therefore few people are filers. A large part of the economy is unregistered and thus informal. All people are still paying indirect taxes and no one is spared. Forcing people to file income returns, as pointed out in the above article, is bound to depress the economy and the balance of payment and the internal deficit are bound to escalate by the measures adopted so naively by the government.

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Taha

Nov 07, 2018 09:10pm

The most absurd way of putting a good measure of the government. We all know all black money is parked in property n automobile industry. :-( poor approach.

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Taha

Nov 07, 2018 09:10pm

Very bad approach

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Aamir Mehdi

Nov 07, 2018 09:24pm

There is no alternative to the ban put in place by the Govt. Enough is enough. We must differentiate between honest tax payers and dishonest tax evaders.
If the writter has any practical suggestion he should come up with the same.

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Kaspar

Nov 07, 2018 11:18pm

@naim, You are sadly mistaken. Every country, including the so-called developed countries, have an informal economy. I'd suggest you do some research on google about this.

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amir

Nov 07, 2018 11:45pm

more tougher regime are required where non filers are penalized.
on the other side FBR needs to simplify tax filing
investment in real estate needs to be abolished. only those genuine buyers who wants to build a house allowed to purchase
companies who are not filing tax for their employees needs to be ID and penalized
we have to start somewhere. these car dealers have minted money and will continue to do so. and cars are much expensive in Pakistan compared to India

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Jon Elia

Nov 08, 2018 02:05am

Very muddled article. If he was advocating non-tax filing in USA he would face criminal charges,as every American is required to file a tax return, regardless of the amount of his income.

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Saad khan

Nov 08, 2018 02:37am

On the contrary would it not be an improvement if more people become filers. I mean in a country where less than 1% of people pay taxes any increase will be welcome. In fact I would put it a step further by moving it onto second hand cars as well.

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Lahori kid

Nov 08, 2018 02:49am

@Danish, Pakistan tax system has been run by people who themselves don't pay a penny in tax, they find loopholes and exploit them, we can call the system corrupt, but the fact is, the people make up the system, the system is only as good as the people who run it, my initial point. Corruption is so wide spread in Pakistan, and in Asia in general, it can never be eliminated. Period. As for the tax system, it needs a complete overhaul.

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Syed Anjum Ali

Nov 08, 2018 02:57am

I don't agree with many points in this article. The principle of banning non filers is sound, the practical aspects need to be fixed and fine tuned; and, in addition, tax evasion laws must be strictly implemented. Conspicuous consumption by households must be also monitored and data evaluated . How to achieve these goals? The new government must brainstorm and bring about drastic and urgent reforms to set aright the present situation.

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Akil Akhtar

Nov 08, 2018 04:43am

Its a good policy.....

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Illawarrrior

Nov 08, 2018 06:32am

@naim, Forcing people to file tax returns goes a long way to raising the taxes to pay for that free, compulsory education. Most advanced economies, with the exception of a few oil-rich nations, have well enforced taxation laws. Of course their citizens hate paying it, but in return they get reliable power supplies, roads, schools, hospitals, transport, police, fire fighters etc etc., as can Pakistan, when it gets serious about taxation.

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Illawarrrior

Nov 08, 2018 06:33am

The ban needs to be on ALL vehicle registrations, new or used.

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ShahidF

Nov 08, 2018 07:48am

We allowed the market to accomodate all non fillers rich people to operare freely and become richer.Therefore whenever you will try to restrain them we will hear such stories and it is true that economy will also slow down.But this is required when you have a huge and dangerous current account deficit because your economy is import based.I think the Govt low cost housing plan can address the employment concern highlighted in this article.

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Imran

Nov 08, 2018 08:28am

The ban should extend to used car sale vehicle too. Even if a few people decide to file taxes instead of loop hole premium the measure would be worthwhile. The author sounds like an apologist for tax evaders

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Faraz

Nov 08, 2018 08:53am

There should be a blanket ban on buying new, used and registered cars by non-filers. Simply, a non-filer should not be able to purchase a vehicle, period. This will close the loop hole of going around this law. However, i don't hold much confidence in the current incompetent government.

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Liaqat

Nov 08, 2018 09:59am

A lot can be stated against the views of the author but in brief we must not ignore the fact that law abiding citizens particularly tax payers had always been punished in Pakistan therefore the ban so imposed must continue not only for expanding revenue base but documentation n of the economy.

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Saad Ali Dar

Nov 08, 2018 11:38am

Your point of view does not make sense. Middle class families should opt to buy the car directly and get the car in a couple of months, no need to pay the premium amount as you have rightly said that the overall orders have decreased and now they can get the car even earlier, its a win-win for them. I do not see any issue in this regard.

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Abid

Nov 08, 2018 01:32pm

Sorry sir but non filers shouldn't be given a pass. This is injustice to filers.

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Reyna Dev

Nov 08, 2018 01:54pm

The article is informative, however, it does not propose a practical workable alternative to the massive tax evasion that we all see around us. Therefore, this is a good, if not perfect, solution as people will eventually need to buy cars and property.

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Operation Rajiv 87

Nov 08, 2018 02:13pm

This is leading to more corruption. Period

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Imran

Nov 08, 2018 02:35pm

The author is correct. In any other kleptocratic state, you would never make things easier for thieves.

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Irfan Ahmad

Nov 08, 2018 03:35pm

Just because there are loopholes in the automotive purchasing process doesn't mean that we should remove the ban on non-filers. We should enforce the ban on non-filers on ALL vehicle transactions. Period. If you are not a tax filer you cannot buy a car. If you have saved your money without having to pay taxes you should be able to show this monetary accumulation through your income/bank statements and you should become a filer with zero taxes.

Let us not make excuses to allow those with untaxed wealth to continue to flaunt it.

As far as construction work is concerned, it is certainly a catalyst and multiplier in the economy. Whatever slack comes from restricting non-filers from buying property can be taken up by the 5 million housing project.

Overseas Pakistanis have been made exempt from this rule for real estate - I am not sure if this applies for automotive purchases as well. If not, let us make allowances for them. The primary intent is to restrict those with untaxed wealth.

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Kamran

Nov 08, 2018 07:01pm

@naim, you probably didn’t realize that indirect tax burdens the poor and not the rich. You may want to read up on how indirect taxation that you mentioned effect the poor people and favours the rich. One simple example for you. If a rich person is supposed to pay 1 correctly in tax, indirect sales tax will never get to this amount on yearly basis.

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Hamad S

Nov 08, 2018 07:37pm

We need clear and declared finances to become the norm in Pakistan.

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naji

Nov 08, 2018 10:19pm

It is not a good and beneficial idea to nearly stopping non filer to get involve in Pakistan's business activities. We have thousands of expatriate who visit Pakistan for short and long time interval. For example, if a man came back to Pakistan after 5-10 years and try to purchase a car in his name for their old parent's name or even in his own name, that will be very discouraging for all, that son, and his parents. Same with the property purchase. Govt. must think over it.

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Lahori kid

Nov 09, 2018 03:01am

Fact is, there is plenty of corruption to go around, it starts at the top, and goes all the down to the doorman. And there are plenty of huge loopholes in our law, the simplest and the most abused one is "Gift" Until we reform the tax laws, you cannot enforce these so called non filers from buying anything. There are plenty of ways to get around the laws.

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Bilal Ahmed

Nov 09, 2018 08:06am

There is a simple opportunity for tax-filing dealers to charge large premiums simply by registering new vehicles and selling them as such to filers and non-filers alike. (Misleading info)
It is not possible for dealer to register the car over his name which he is going to sell. Dealer can not transfer the new car to non filer.

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Pakistani

Nov 09, 2018 01:48pm

Have a simple tax calculation regime and low tax rates but strict enforcement.
Start sending people to jail for non filing.

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Falcon1

Nov 09, 2018 02:57pm

Those who want to and have reason to circumvent the restrictions, will always find creative ways to go around it and still get what they want.

Something for India to learn from Pakistan. Excellent tool. If people can’t use their money they start declaring to use it.

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The Logical Pakistani

Nov 10, 2018 01:03pm

@A, You need to have a proper system of governance and a high degree of automation to make this work.India and Pakistan are not developed enough yet.The best way is just to create a flat tax that is incorporated into the sale of everything.